(Adds analyst comment, background, writes through)
By Anna Ringstrom
COPENHAGEN, May 4 (Reuters) - Danish foreign reserves rose more than expected in April, data showed on Monday, and analysts said this meant the central bank would probably cut key interest rates more than the European Central bank this week.
Foreign exchange reserves rose by a 25.6 billion Danish crowns ($4.6 billion) to 286.4 billion.
Key rates in Denmark, whose currency is pegged to the euro, until May 2008 roughly tracked European Central Bank rates, at a 25 basis points higher level.
But as investors last year fled to bigger and safer markets amid the deepening global crisis, the Nationalbank fought to defend the crown by widening the premium substantially to attract traders.
As investors began returning to Danish markets this year, pressure eased again on the crown, allowing the central bank to narrow the rate gap to a current 75 points from a 175-points peak in December.
The ECB is widely expected to cut rates by 25 basis points to 1.0 percent on May 7. [ECB/INT]
Economists said on Monday the Danish reserves data increased the likelihood the Nationalbank would follow suite the same day with an even bigger cut, from its current 2.0 percent level.
"The crown is currently trading below 7.45 to the euro and combined with a continued big reserve intake in April, possibilities should be good for a narrowing of the rate gap on Thursday," said Christian Hilligsoe Heinig, analyst at Sydbank.
News a month ago, however, about a robust rise in reserves did not prompt the Nationalbank to cut interest rates at the time, which surprised analysts.
Hilligsoe Heinig said on Monday gap would probably come down to between 25 and 10 basis points on Thursday. "(But) overall the uncertainty is big in light of the outcome of the April meeting when the same arguments were valid."
Danske Bank analyst Frank Oland Hansen, too, said conditions were in place for a narrowing of the gap. "The currency reserve is record big and the inflow of foreign currency remains good," he sai but added:
"The Nationalbank has however indicated it wants a very large currency reserve. So the question is, is 286 billion big enough?"
Oland Hansen saw the gap shrinking by a modest 10 points.
"Thereby the rate gap will be big enough for them to keep increasing the currency reserve, while at the same time they normalise the rate gap somewhat," he said.
The crown is pegged to the euro in a 2.25 percent band around a central rate of 7.46038
The median forecast in a Reuters survey had been for April currency reserves of 272.7 billion crowns, excluding central government foreign loan transactions.
The central bank said it had bought foreign currency in the month for 9.8 billion crowns and the central government had obtained foreign loans worth 15.9 billion.
"In April, Denmark's Nationalbank's net purchase of foreign exchange due to intervention in the foreign exchange market amounted to 8.9 billion crowns," the central bank said in a statement.
Nordea analyst Anders Matzen said the continued net borrowing in foreign currency indicated that the Nationalbank was still not happy with the size of the currency reserve.
Matzen said the bank had showed last month it was in no hurry to shrink the gap, and forecast a 10 basis point narrowing on Thursday.
Analysts said the April reserve data was record high.
A Nationalbanken spokeswoman said the April foreign currency reserve was the largest on record immediately available, for the period 1977-April 2009. ($1=5.626 Danish Crown)
(Additional reporting by Teis Jensen, Henriette Jacobsen and Ole Mikkelsen)